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Government's Stranglehold on Policy Rate Call Can Interfere With RBI Governor's Veto Power

Finance Minister’s revised draft takes away RBI governor’s veto power, proposes seven-member committee with four government nominees.

Published: 24th July 2015 03:01 AM  |   Last Updated: 24th July 2015 03:01 AM   |  A+A-

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The Reserve Bank of India | REUTERS

NEW DELHI: In a move that could take away the veto power of the RBI governor in deciding key interest rates, the government on Thursday proposed setting up of a powerful committee that will steer policy decisions.

Also, the revised draft of Indian Financial Code (IFC) released by the Union Ministry of Finance on Thursday proposed a new committee with three members from the RBI and four from the central government, thus giving the government total control on the policy rate.

rbi.jpgGiving further rise to speculation, the draft mentions ‘RBI Chairperson’ and not ‘RBI Governor.’ Currently, RBI is headed by a Governor. “Inflation target for each financial year will be determined in terms of the Consumer Price Index (CPI) by the Central government in consultation with the Reserve Bank every three years,” said the draft, on which the Finance Ministry has invited comments till August 8.

The government and the central bank are already in a pact for an inflation target of 4 per cent with a plus/minus band of 2 per cent from financial head ending 2017 onwards. It also said the RBI “must constitute a Monetary Policy Committee to determine by majority vote on the Policy Rate required to achieve the inflation target.” Currently, the RBI Governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while deciding on the monetary policy.

The first draft, submitted in March 2013, too had talked about the committee and majority vote, but gave powers to RBI chairperson to supersede the decision of the panel. “In exceptional and unusual circumstances, if the RBI Chairperson disagrees with a decision taken at a meeting of the Monetary Policy Committee, the RBI Chairperson will have the right to supersede such decision,” it had said. The provision was dropped in the revised draft.

The IFC proposes a panel that will be decide the key policy rate and chase the annual retail inflation target, to be decided by the Centre in consultation with RBI.

Bure Din for RBI

■ Monetary policy committee will be entrusted with the task of deciding the key policy rate and chasing the annual retail inflation target, to be decided by the government in consultation with RBI

■ There will be 3 members from RBI side and 4 from Centre, thus giving full control to the government on policy rate

■ On capital controls, the new draft said the central government must make rules in consultation with the RBI, in a manner that encourages investment and economic growth



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